Internal Audit Chief Turnover; the Quality of Financial Reporting and Audit Report Delay

Document Type : Research Paper

Authors

1 Assistant Prof., Department of Accounting, Faculty of Social Sciences and Economics, Alzahra University, Tehran, Iran.

2 MSc., Department of Auditing, Faculty of Social Sciences and Economics, Alzahra University, Tehran. Iran.

Abstract

Objective: The role of the internal audit chief is pivotal in the internal audit sector, as they play a crucial role in enhancing the company's internal controls and ensuring the quality of financial reporting. Auditors also place great significance on internal controls. Independent auditors may need less time to review financial statements in companies with strong internal controls. This study seeks to investigate the relationship between internal audit chief turnover with the quality of financial reporting and audit report delay.
Methods: In this study, the assessment of financial reporting quality was conducted using the modified Jones model, while the measurement of audit report delay was performed by calculating the time gap between the company's financial year-end date and the issuance date of the independent audit report. The data from companies listed on the Tehran Securities Exchange between 2013 and 2022 were collected and analyzed using regression models.
Results: The results obtained from the analysis revealed a positive and significant correlation between the turnover of internal audit chiefs and financial reporting quality. Furthermore, a negative and significant relationship was identified between the turnover of internal audit chiefs and the delay in issuing independent audit reports.
Conclusion: The results showed that periodic turnover of the internal audit chief can lead to strong internal controls on financial reporting and subsequently increase the quality of financial reporting. This can be attributed to the fact that a new internal audit chief often brings a higher level of independence, and motivation, as well as fresh knowledge, expertise, and insights to the role. Accordingly, s/he can do the job more effectively. In addition, having a new internal audit chief who is relatively independent and has the necessary innovation to perform the job and organizational duties can improve the quality of internal controls on financial reporting. As a result, independent auditors place greater reliance on these controls, leading to a reduction in substantive testing of financial statements. Consequently, with the turnover of the internal audit chief, there would be a decrease in the delay of audit reports. According to the achieved results, to enhance the quality of the company's financial reporting, audit committees, as the overseers of the internal audit function, should regularly address the matter of internal audit chief turnover. By paying close attention to this issue at appropriate intervals, audit committees can ensure effective management and continuity in the role, ultimately contributing to improved financial reporting quality. Moreover, the shareholders, investors, analysts, and regulators need to consider the turnover of the internal audit chief and the possible effects on the quality of financial reporting in their decisions. To effectively conduct and complete the audit of financial statements, it is recommended that independent auditors and their clients give due consideration to the impact of internal audit chief turnover. This includes recognizing its potential effects on the required extent of substantive testing. By being aware of this factor, auditors and their clients can appropriately adjust their audit procedures to ensure comprehensive and accurate financial statement audits.

Keywords

Main Subjects


 
Accounting Standards Development Committee. (2014). Financial Reporting Conceptul Framework. Auditing Organization. (in Persian)
Aghaei, A. (2015). Investigation the relationship between the reliance of independent auditors and the performance of internal auditors. First International Conference on Accounting, Management and Innovation in Business, Some Sara. (in Persian)
Anderson, U. (2003). Assurance and consulting services. Research opportunities in internal auditing, 1, 1-23.
Arab Salehi, M., & Akhlaghi, H. (2012). Investigation of the Effect of Investment Opportunities, Financial Resources, and Tax on Dividend Payout Policy in Listed Companies in Tehran Stock Exchange. The Journal of Stock Exchange, 4(4): 101-118. (in Persian)
Ashbaugh‐Skaife, H., Collins, D. W., Kinney Jr, W. R., & LaFond, R. (2008). The effect of SOX internal control deficiencies and their remediation on accrual quality. The accounting review, 83(1), 217-250.
Audit organization. (2008). Financial reporting conceptual framework. Available in: https://audit.org.ir/WFrmCodificatedStandardView.aspx?Id=2. (in Persian)
Auditing Standards Development Committee. (2018). Auditing Standards No. 610. Auditing Organization. (in Persian)
Bagherzadegan, A. & Khanmohammadi, M.H. (2019). Investigate the relationship between the quality of accounting information and corporate governance by investing in the main operations of the company. Management Accounting, 12(1), 1-14. (in Persian)
Bayat, A., & Ali Ahmadi, S. (2014). Audit delay and financial reporting timeliness. The Financial Accounting and Auditing Researches, 6(2): 97-121. (in Persian)
Beest, F. V., Braam, G. J. M., & Boelens, S. (2009). Quality of Financial Reporting: measuring qualitative characteristics. Available at: https://repository.ubn.ru.nl/bitstream/handle /2066/74896/74896.pdf.
Bills, K. L., Huang, H. W., Lin, Y. H., & Wood, D. A. (2020). Chief Audit Executive Turnover: Market Reactions, Financial Reporting Quality, and Audit Risk Assessment, Available at SSRN: https://ssrn.com/abstract=3464557.
Carcello, J. V., Eulerich, M., Masli, A., & Wood, D. A. (2020). Are internal audits associated with reductions in perceived risk? Auditing: A Journal of Practice & Theory, 39(3), 55-73.
Christ, M. H., Masli, A., Sharp, N. Y., & Wood, D. A. (2015). Rotational internal audit programs and financial reporting quality: Do compensating controls help? Accounting, Organizations and Society, 44, 37-59.
Desai, R., Desai, V., Libby, T., & Srivastava, R. P. (2017). External auditors' evaluation of the internal audit function: An empirical investigation. International Journal of Accounting Information Systems, 24, 1-14.
Felo, A. J., Krishnamurthy, S., & Solieri, S. A. (2003). Audit committee characteristics and the perceived quality of financial reporting: an empirical analysis. Available at SSRN 401240.
Fotuhi, M. (2016). Investigation association between audit committee characteristics and internal audit function efficiency with financial reporting quality. Msc thesis, Takestan Institude. (in Persian)
Gamayuni, R. R. (2018). The effect of internal audit function effectiveness and implementation of accrual-based government accounting standard on financial reporting quality. Review of Integrative Business and Economics Research, 7(1), 46-58.
Gebrayel, E., Jarrar, H., Salloum, C., & Lefebvre, Q. (2018). Effective association between audit committees and the internal audit function and its impact on financial reporting quality: Empirical evidence from Omani listed firms. International Journal of Auditing, 22(2), 197-213.
Hashim, U. J., & Abdul Rahman, R. (2011). Reviewing the literature on audit report lag and corporate governance. Available at SSRN 2207811.
Institute of Internal Auditors (IIA). 2004. International standards for the professional practice of internal auditing. Available at: Pages - Mandatory Guidance (theiia.org).
Iyer, V. (2016). CAE Career Paths. Characteristics and Competencies of Today’s Internal Audit Leaders. Available at: http://contentz.mkt5790.com/lp/2842/203310/IIARF%20CBOK %20CAE%20Career%20Path%20March%202016.pdf
Jiang, L., Messier Jr, W. F., & Wood, D. A. (2020). The association between internal audit operations-related services and firm operating performance. Auditing: A Journal of Practice & Theory, 39(1), 101-124.
Krishnan, J., Wen, Y., & Zhao, W. (2011). Legal expertise on corporate audit committees and financial reporting quality. The Accounting Review, 86(6), 2099-2130.
Lewellen, J., & Shanken, J. (2002). Learning, asset‐pricing tests, and market efficiency. The Journal of finance, 57(3), 1113-1145.
Lewellen, J., & Shanken, J. (2002). Learning, asset‐pricing tests, and market efficiency. The Journal of finance, 57(3), 1113-1145.
Mashayekhi, B., Hasan Zade, SH., Amini, Y., Mennati, V. (2015). Audit cooperation effect on audit report timeliness. Practice and Theory Auditing, 2(3): 91-109. (in Persian)
Mashayekhi, B., Yazdanian, A. (2018). Identifying key elements of internal audit. Accounting and Auditing Review, 25(1), 135-158. (in Persian)
Montasheri, M. (2015). The role of financial reporting quality in reducing the effects of limiting profit sharing. First International Conference on Management, Economics, Accounting, and Education, Neka. (in Persian)
Moradi, J., & Zakizadeh, Z. (2014). The Effect of Ethical Leadership, Internal Audit Function and Moral Intensity on Financial Reporting Decisions. Journal of Accounting Knowledge, 5(3), 141-163. (in Persian)
Mousavi Shiri, M., Ghadrdan, E., Hosseini, H.S. (2018). Internal audit rotation role in financial reporting quality. The Journal of Audit Science, 19(1), 77-106. (in Persian)
Nazari, H., Soukhakyan, I., Tahriri, A. (2020). Characteristics of the Chairman of Audit Committee and Timely Financial Reporting. Journal of Accounting Knowledge, 11(3), 131-165. (in Persian)
Nikkhah Azad, A., Ghannad, H.R. (1998). Factors of lack of development and methods of improvement of internal audit in Iran, Accounting and Auditing Review, 6(1), 35-59.
(in Persian)
Nikpour, M., Hemmat Far, M. (2020). Determinants of the delay in issuing the audit report. International Conference on Challenges and New Solution in industrial Engineering and Accounting and Management, Sari. (in Persian)
Pizzini, M., Lin, S., & Ziegenfuss, D. E. (2015). The impact of internal audit function quality and contribution on audit delay. Auditing: A Journal of Practice & Theory, 34(1), 25-58.
Safari Gherayli, M. & Ranaei, F. (2014). A review of financial reporting quality literature and its measurement models. First International Conference on Accounting and Management, Tehran. (in Persian)
Saghafi, A., Arabmazar, M. (2011). Financial Reporting Quality and Investment Inefficiency. Journal of Financial Accounting Research, 2(4), 1-20. (in Persian)
Securities and Exchange Organization. (2012). Internal Control Instruction for Listed Companies in Tehran Exchange and Iran Fara Bourse. (in Persian)
Skills Rotation. (2019). European Confederation of Institutes of Internal Auditing (ECIIA). https://www.eciia.eu/wp-content/uploads/2019/12/Skills-Rotation-v5-digital.pdf.
Valizadeh Larijani, A., Hosseini, S., Aliasgari, A. (2022). Investigating the Consequences of Internal Audit Quality in Preventing Accrual-Based Earnings management and Real Earnings Management. Financial Accounting Knowledge, 9(2), 71-95. (in Persian)